E-COMMERCE: JD Dodges a Bullet, Gets Support from E-Commerce Has-Been

Bottom line: A US prosecutor's decision not
to file rape charges against JD.com's founder may bring short-term
relief to the stock, but the case still shows the importance of
understanding the unusual role Chinese founders play at their
companies.

On this day after Christmas I
thought I'd play a little catch-up by weighing in on the
controversial decision that saw a Minnesota prosecutor decline to
press rape charges against JD.com's (Nasdaq: JD) founder and CEO Richard Liu.
Following the big announcement at the end of last week, there's
been a minor follow-up as another former China e-commerce executive
came to Liu's defense, only to get blasted himself and end up
issuing an apology.

There are several big lessons in this tale, led by the fact that
Chinese standards for what constitutes acceptable behavior are not
always in sync with those in the West. That's an important lesson
for Western investors who may buy into these companies thinking
that, for example, a JD.com is the same thing as
Amazon.com (Nasdaq: AMZN). The JD case shows that
clearly there are major differences in terms of behavior by both
the companies and their founders.

A second lesson is that this case shows just how reliant
companies like JD are on their founders, who are often
larger-than-life figures whose own fortunes are inextricably tied
to their companies. That's not to say similar things don't happen
in the West. Mark Zuckerberg and Jeff Bezos are synonymous with
Facebook (Nasdaq: FB) and Amazon, respectively.
But in most cases many would argue their companies would be able to
survive without their founders at the helm, which is something
we've seen at Apple (Nasdaq: AAPL) following the
death of Steve Jobs.

All that said, let's turn our attention to JD with a quick recap
of the story. The affable though somewhat country bumpkin-ish
Richard Liu splashed into the headlines in late summer when a
student accused him of rape while he was on a short-term study
program at the University of Minnesota. Police conducted an
investigation and handed over the case to the local prosecutor's
office a short time later to decide whether to press charges.

The prosecutor ended up taking its time to make a decision, and
finally announced no charges would be filed at the end of last
week, conveniently when less people were looking just before the
holidays. (English
article) The office cited "profound evidentiary problems"
behind its decision, saying it was unlikely that any criminal
charge could be proven beyond a reasonable doubt.

In all fairness, it does seem like these kinds of cases may be
hard to prove. On the one hand it's relatively straightforward to
prove that a sexual act occurred, but quite another to show there
was lack of consent. We did receive some salacious details that
were leaked to the media along the way, including some text
messages sent by the victim that did appear to show she was being
taken advantage of. But Liu himself is quite a wealthy and
influential man, and I suspect his expensive lawyers could have
found ways to easily shoot down any arguments made by the alleged
victim.

Bigger Issues

The case had weighed heavily on JD's stock, which lost around 40
percent of its value in the months after the news broke. The shares
jumped after the decision was announced, but quickly gave back most
of the gains and are now down by more than half from a peak in
early June. Some talk has been going around that a movement may be
afoot to replace Liu, who holds an overwhelming portion of the
company's voting shares, or at least play down his role at the
company.

Another interesting aside came earlier this week when Liu got
some words of support from a man named Li Guoqing, the founder and
former CEO of Dangdang, which was once billed as
China's Amazon. Li had called the incident merely an "affair" and
even offered some tips on how to court a woman more properly.
(English
article) He issued an apology not long afterwards following an
uproar over his remarks, though the apology seemed a bit muddled in
my view.

The bottom line does appear to be that Chinese standards are a
bit lagging behind the West in some instances, though clearly this
case does seem to show the gap is closing. The fact that JD's stock
continued its slump even after Liu was cleared also seems to point
to Western investors' realization that JD's fate is not so strongly
tied to Liu as it is to the broader Chinese economy, which is
clearly hurting these days.

All that said, it's still important for Western investors to
realize that these US-listed Chinese companies really shouldn't be
compared to local peers in terms of company behavior and behavior
of their top executives. Instead, any serious investor should do a
little homework and try to understand where these companies and
their founders might be vulnerable, both due to personal issues and
also issues particular to the Chinese environment.